Fed rate move could help stabilise the yuan, Bank of Tokyo says

[BEIJING] An increase in US interest rates by the Federal Reserve will remove a key uncertainty for the Chinese yuan and could help stabilise the currency, according to Bank of Tokyo-Mitsubishi UFJ (China) Ltd.

"That will wipe out one of the biggest uncertainties and, in that sense, it may be good for China," said Li Liuyang, a Shanghai-based chief financial market analyst at Bank of Tokyo- Mitsubishi. "The yuan may stabilise after a one-time shock, which in turn will bring stability in local rates as the need for currency intervention decreases." Traders give a 32 per cent probability of a rate increase at the Fed's Sept 16-17 meeting. While that's up from as low as 26 per cent Monday, it's still well below the 50 per cent odds before China roiled global markets by devaluing the yuan last month. The surprise Aug 11 depreciation triggered the yuan's steepest slide in two decades and has prompted the People's Bank of China to intervene to support the currency. The monetary authority has simultaneously injected funds into the banking system to replace yuan bought and keep money-market rates steady.

The benchmark seven-day repurchase rate, a gauge of interbank funding availability, rose two basis points to 2.38 per cent as of 12:29 pm in Shanghai in a third day of gains, a weighted average from the National Interbank Funding Center shows. The yield on 10-year sovereign bonds due July 2025 increased one basis point to 3.32 per cent, according to data from the National Interbank Funding Center.

Yuan positions at China's central bank and financial institutions fell by the most on record in August, adding to signs that policy makers stepped up intervention to support the exchange rate. The PBOC had last week reported a record US$93.9 billion monthly decline in its foreign-exchange reserves.

A decision by the Fed to keep borrowing costs unchanged this week won't have much of an impact on China as external uncertainties will remain in place, said Mr Li.

China is in one of the strongest positions among the Asia- Pacific region's largest economies to weather higher US rates, according to a Bloomberg Intelligence analysis. High foreign reserves, low external debt and low foreign-held public debt all help buffer the economy from external shocks, according to Bloomberg economist Fielding Chen in Hong Kong.

BLOOMBERG